Real Growth as Assessed by ADS Looks OK So Far

A weak jobs report, and much more importantly the related and absurd firing of the BLS commissioner on August 1, have dominated the recent news. But the firing is a topic for a subsequent blog.

For now let's step back and take a look at the broad U.S. employment/growth picture. Employment gains have evidently slowed in recent months, but job destruction as indicated by initial claims has not risen. Initial claims are a key component of the ADS index of real economic activity, and ADS recently and currently continues to indicate "typical", or "average", growth. So: so far so good, but keep your eye on initial claims in future weeks (updates arrive every Thursday). Fingers crossed.

More on Big Data and Mixed Frequencies

I recently blogged on Big Data and mixed-frequency data, arguing that Big Data (wide data, in particular) leads naturally to mixed-frequency data.  (See here for the tall data / wide data / dense data taxonomy.)  The obvious just occurred to me, namely that it's also true in the other direction. That is, mixed-frequency situations also lead naturally to Big Data, and with a subtle twist: the nature of the Big Data may be dense rather than wide. The theoretically-pure way to set things up is as a state-space system laid out at the highest observed frequency, appropriately treating most of the lower-frequency data as missing, as in ADS.  By construction, the system is dense if any of the series are dense, as the system is laid out at the highest frequency.

On the Real-Time GDP War

A few days ago the WSJ did an interesting piece, Fed Banks Spar Over GDP Data, highlighting that the "race to provide credible real-time data on U.S. economic growth is pitting the Federal Reserve Bank of New York against its sibling in Atlanta."

In all this, real-time data on "economic growth" is interpreted as real-time data on GDP growth.

In my opinion, all of the real-time GDP products basically reflect a misguided perspective if the goal is real-time tracking of economic growth (which is as it should be, and what is claimed). If you want to track real-time growth, you should be tracking an extraction of a broad dynamic factor, effectively averaging over many indicators, not just tracking real-time GDP. That has been the leading and invaluable perspective from Burns and Mitchell straight through to modern dynamic-factor approaches.  My favorite, of course, is the FRB Philadelphia's ADS Index, but there are many others.

ADS Perspective on the First-Quarter Contraction

Following on my last post about the first-quarter GDP contraction, now look at the FRB Philadelphia's Aruoba-Diebold-Scotti (ADS) Index. 2014Q1 is the rightmost downward blip. It's due mostly to the huge drop in expenditure-side GDP (GDP_E), which is one of the indicators in the ADS index. But it's just a blip, nothing to be too worried about. [Perhaps one of these days we'll get around to working with FRB Philadelphia to replace GDP_E with GDPplus in the ADS Index, or simply to include income-side GDP (GDP_I) directly as an additional indicator in the ADS Index.]

Source: FRB Philadelphia

One might wonder why the huge drop in measured GDP_E didn't cause a bigger drop in the ADS Index. The reason is that all real activity indicators are noisy (GDP_E is just one), and by averaging across them, as in ADS, we can eliminate much of the noise, and most of the other ADS component indicators fared much better. (See the component indicator plots.)

Note well the important lesson: both the ADS Index (designed for real-time analysis of broad real activity) and GDPplus (designed mostly for historical analysis of real GDP, an important part of real activity) reduce, if not eliminate, measurement error by "averaging it out."

All told, ADS paints a clear picture: conditional on the underlying indicator data available now, real growth appears to be typical (ADS is constructed so that 0 corresponds to average growth) -- not especially strong, but simultaneously, not especially weak.